It is an anti tax avoidance measure where a parent company opens a subsidiary in low tax jurisdiction and then evade the tax by non distribution of dividend or profits to the shareholders of parent company.

Here it is…..

Controlled Foreign Corporations (CFCs) are corporate entities incorporated in an overseas low tax jurisdiction and controlled directly or indirectly by residents of a higher tax jurisdiction (Parent State). Since each corporate entity is treated as a separate legal entity, the profits earned by such CFCs are not taxed at the owner level until they are distributed (as dividends to shareholders).

CFCs tend to earn passive income; such income is not distributed, thereby resulting in tax deferral in the Parent State. It is to curb such tax avoidance that CFC Regulations are legislated by various countries.

For example a 100% subsidiary of an Indian company in Japan is a CFC in India. The passive income of such CFCs is then not distributed to the shares holders of CFC to avoid levy of taxes in the parent company home country tax jurisdiction for a long time, thus deferring the incidence of tax on such Income.